There’s no doubt that healthcare is one of the most important—and fastest-growing—components of the U.S. economy. The sheer size of the sector makes it impossible for investors to ignore. It’s a $2 trillion industry that, at least according to the latest demographic data from the federal government, ought to continue to grow well into the 21st century as the first wave of baby boomers enters retirement. Healthcare is so huge, in fact, that it really makes more sense to view it, at least from an investment perspective, as four subsectors: pharmaceutical companies, medical device makers, hospitals and biotechnology.
As we head into the home stretch of the presidential campaign season, the contest in November appears to be anyone’s game. In late August, the Gallup tracking poll showed both Obama and McCain taking—and then losing—front-runner status at least once. A statistically insignificant 1 percent—with Obama in the lead—separated the two candidates on August 27, the day before Obama was scheduled to receive the official nomination of his party. About the only thing we can be sure of at this point is that come January, there will be a new occupant taking up residence at 1600 Pennsylvania Avenue.
For long-term investors in the healthcare space, a change of presidential administrations presents a myriad of challenges as well as opportunities. Different subsectors stand to benefit—and lose—depending on who wins in November.
Below, we review some of the principal planks in the Obama and McCain healthcare platforms and offer suggestions for ETF investors looking to position their portfolios ahead of the presidential election.
When it comes to healthcare policy, for instance, Obama and McCain both see problems with the current system, and the ways the candidates propose addressing them reveal much about the governing philosophy each would bring to the presidency.
There’s no question that the system of healthcare delivery in the U.S. is broken. The latest data from the Census Bureau indicates that the number of Americans without health insurance fell by 1 million in 2007. That’s the good news. The bad news is that 45.7 million of us still aren’t covered by a government- or employer-sponsored healthcare plan.
McCain would address the problem of access to healthcare by creating incentives for individuals and families to buy their own coverage, relieving the private sector of much of this burden. In addition, McCain proposes to improve efficiency by introducing “market discipline” to the healthcare sector. Under McCain’s plan, individuals and families who purchased their own health insurance would receive a tax credit of up to $5,000 to offset that cost. At the same time, McCain would remove the regulatory barriers that prevent consumers from shopping for coverage in a truly national marketplace. McCain’s plan reflects his belief that market discipline is the key to improving consumer choice and eliminating waste and inefficiency.
Obama’s plan, if implemented, would be more of a game-changer than McCain’s. Under his proposal, the government would fund a program to provide coverage for the 45.7 million people who aren’t currently enrolled in an employer- or government-sponsored healthcare plan. Unlike the Clinton-era proposal for universal coverage, however, Obama wouldn’t seek to dismantle the current private health insurance industry. Rather, the government-funded plan would exist side by side with private plans.
The implications for investors could be far-reaching. According to Obama’s campaign literature, the initial cost of covering uninsured Americans would be at least $70 billion a year—a conservative estimate, if the Massachusetts universal coverage plan implemented under former Governor Mitt Romney is any indication. If Obama manages to pull off his ambitious proposal, then the ETFs most likely to thrive would be those, like iShares Dow Jones U.S. Pharmaceuticals Index Fund (IHE) and the Dow Jones U.S. Healthcare Providers Index Fund (IHF), that cover the broad pharmaceutical sector and hospitals and other companies in the medical delivery sector.
Under McCain, ETFs that focus on the biotechnology and medical devices sectors would likely see the biggest gains. The Biotech SPDR (XBI) is the least expensive ETF in the biotechnology space, with a 0.35 percent expense ratio, and it has also been the best-performing biotech ETF over the past several months. The iShares Nasdaq Biotech Index Fund (IBB), with about 170 holdings, offers investors the broadest coverage. Among medical delivery funds, the iShares Dow Jones U.S. Medical Devices Index Fund (IHI) is among the best-capitalized (around $450 million in assets as of late August) and least expensive, with annual fees of 0.48 percent. Profits in the medical devices subsector of the vast healthcare complex have risen fairly steadily, regardless of which way the political winds happen to be blowing, and medical devices ETFs are likely to be reliable long-term plays regardless of which candidate prevails in the general election.
In the coming years, investors are likely to see some big changes not only in healthcare policy, but also in energy and tax policy. Presidents also exercise varying degrees of influence over education and defense spending, and they sit atop the vast federal regulatory apparatus. Among the many items on the next president’s to-do list: addressing the excesses in mortgage lending and in the financial markets that have left banks from Main Street to Wall Street struggling with mounting losses and tight credit markets.
